Recent Trends In Monetary Policy Of India

SUBMITTED BY: Jayant sharma venus bhatia

List of Contents

Introduction Of RBI What is Monetary policy? Goals/Objectives of Monetary Policy Instruments/Tools Of Monetary Policy Quantitative Measures Qualitative Measures Highlights of Monetary Policy 2010-2011 Limitations Of Monetary Policy

Reserve Bank Of India

The Central Bank Of The Country-RBI.

Established In 1935 With a Share Capital Of Rs. 5 crores on the basis of the Hilton Young Comission. The Share Capital was Divided into Rs. 100 each fully paid up which was entirely owned by private shareholders in the beginning. RBI was nationalised in 1949. The govt. held shares of normal value of Rs. 2,20000.

What is Monetary Policy?

Shaw defines monetary policy as any conscious action undertaken by the monetary authorities to change the quantity, availability or cost.., of money. Monetary policy is essentially a programme of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving the objectives of general economic policy

Objectives Of Monetary Policy

Maintain price Stability.

Flow of credit to the productive sectors of the economy. Stability for the national currency. Growth in employment and income. To promote and encourage economic growth in the country.

Instruments of Monetary Policy

SLR
QUALITATIVE

Bank rate

Open market operations

QUANTITATIVE Credit Rationing

Change in Lending margins

Moral Suasion

Cash Reserve Ratio

Direct Controls

Quatitative Instruments

Open Market Operations (OMO): It means the purchase and sale of securities by the central bank of the country. The OMO is the most powerful and widely used tool of monetary control.
Bank Rate: Bank rate is the rate at which the central bank rediscounts the bills of exchange presented by the commercial banks. For practical purposes bank rate is the rate which the central bank charges on the loans and advances to the commercial banks.

The Cash Reserve Ratio (CRR): Cash Reserve Ratio is the percentage of total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank.
Statutory Liquidity Requirement (SLR): The SLR Is that proportion of the total deposits which commercial banks are required to maintain with them in the form of liquid assets (cash reserve, gold and govt. bonds) in addition to CRR.

Qualitative Instruments

Credit Rationing: Under this two measures are adopted: Imposition of upper limits on the credit available to large industries and firms. Charging a higher interest rate on bank loans beyond a certain limit. Change In Lending Margins: The banks provide loans only upto a certain percentage of the value of the mortgaged property. The gap between the value of the mortgaged property and amount advanced is called lending margin.

 Moral Suasion: The moral suasion is a method of persuading and convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country.

Direct controls: Where all other methods prove ineffective, the monetary, authorities resort to direct control measures with clear directive to the banks carry out their lending activity in a specified manner.

Highlights of Monetary Policy 2010-2011

The Reserve Bank announces the following policy measures:

The Bank Rate has been retained at 6.0 percent. It has been decided to increase the repo rate TO 8.50 . The reverse repo rate is increased TO 7.50 per. It has been decided to increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent. The SLR is announced 25%.

Limitations Of Monetary Policy

The time lag : The first and the most important limitation in the effective working of monetary policy is the time lag. i.e. time taken in chalking out the policy action, its implementation and working time.
Problem in forecasting : The formulation of an appropriate monetary policy requires a reliable assessment of the magnitude of the problem-recession or inflation- as it helps in determining the appropriate policy measures.

Non-banking Financial Intermediaries: The structural change in the financial market has also reduced the scope of effectiveness of monetary policy.

Under Development of money and capital markets : The effectiveness of monetary policy in less developed countries is reduced considerably because of the underdeveloped character of their capital and money

markets.

Bank Rate 6.00% (w.e.f. 29/04/2003)

Cash Reserve Ratio (CRR)6.00% (w.e.f. 24/04/2010)Increased Statutory Liquidity Ratio (SLR) 24%(w.e.f. 18/12/2010) Repo Rate under LAF 8.50% (w.e.f.25/10/2011) Increased from 8.25% which was continuing since 16/09/2011

Reverse Repo Rate under LAF * 7.50% (w.e.f.25/10/2011) Increased from 7.25% which was continuing since 16/09/2011 Marginal Standing Facility (MSF) ** 9.50% (w.e.f. 25/10/2011)Increased from 9.25% which was continuing since 16/09/2011 Saving Deposits - For residents RBI has amended the rate of interest on SF accounts in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949 Deregulated by RBI wef 25/10/2011It remained regulated by RBI till 24th October, 2011. (a) It was 4% between 3/5/2011 to 24/10/2011; (b) It was 3.50% between 1/3/2003 to 2/5/2011)

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